TMI Blog2013 (9) TMI 564X X X X Extracts X X X X X X X X Extracts X X X X ..... case and the findings of the DRP, we are of the opinion that the transactions taken place are with domestic enterprises and at least one among the AEs are not non-resident. Both the assessee and other parties which whom the assessee entered into transactions are the residents for the purpose of Indian Taxation. Any transaction between them will not constitute an international transaction. The transactions between the assessee and IJMII do not fall under section 92B(2) of the Act and same is the position in case of other entities with whom assessee carried on the impugned transactions - Provisions of transfer pricing not applicable - Decided against the revenue. Nature of expenses - whether for the purpose of business - genuineness - Deduction was not allowed on the reason that this payment is not verifiable and they doubted the genuineness of the payments. - Held that:- The claim of payment of subcontract by the present assessee was not disqualified for deduction under the Act - Now, coming to next question as to whether the expenditure was capital expenditure or not, we are of the opinion that the expenditure was not a capital expenditure since the assessee did not acquire an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o whom the payments were made - This, the Tribunal held, could not be supplied without detriment to the business interests of that assessee, considering the very nature of things. The initial onus and burden of proof was on the assessee - In the instant case, such initial onus and burden of proof had been duly discharged by the Assessee Company by producing its audited books of accounts, payment vouchers-and other documents giving full details as to the nature of transactions, which necessitated the payment of such subcontract works and that this was an accepted norm and established in this line of business and that without such payment, it was not possible to survive in this line of business, as well as the prevalent trade practice in the line of business carried on by the Assessee Company all along. However, in this case the inflating of expenditure by the assessee cannot be ruled out. Considering the entire facts and circumstance of the case and chances of inflating the expenses by the assessee, to meet the ends of justice, we are inclined to disallow 15% of this payment. - Decided partly in favor of assessee. - ITA No. 1814/Hyd/2012 - - - Dated:- 22-8-2013 - CHANDRA POOJ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ging or computation provision relating to income under the head "Profits Gains of Business or Profession" do not refer to or include the a mounts computed under Chapter X and therefore addition made under Chapter X is bad in law. 9. The Hon'ble DRP has erred in confirming the additions made by the TPO by accepting the extreme profit margin rate comparables. 10. The learned assessing officer, TPO and the DRP has erred in making additions in respect of individual international transactions despite making adjustment at enterprise level profit margin using TNMM. 11. The findings and the conclusions of the learned Transfer pricing officer, DRP and the assessing officer are incorrect, bad in law and liable to be quashed. 12. On facts and in the circumstances of the case and law applicable, the addition on account of transfer pricing adjustment amounting to Rs. 104,95,00,000/- is to be deleted in entirety. 13. The learned Dy. Commissioner of Income Tax, Circle 2(1), Hyderabad, has erred in making the addition of Rs. 2,29,00,000 in respect of the sub-contractors. 14. The learned Dy. Commissioner of Income Tax, Circle 2(1), Hyderabad, has erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Act, 1961 on 27th October, 2011 determining the Arms Length Price at Rs. 104.95 crores. Subsequently, the Assessing Officer has completed the Draft Assessment order on 30.12.2011, computing the total taxable income at Rs. 130,46,32,760. Finally, the draft Assessment order was served on the assessee on 30.12.2011. Details of the additions considered by the Assessing Officer are as under: Sl.No. Particulars Addition (Rs.) (1) Additions u/s. 92CA 104,95,00,000 (2) Disallowance of sub-contractor payments 2,29,00,000 (3) Disallowance of difference in subcontractor accounts 10,54,00,000 (4) 5% disallowance on some of the subcontractors payments 1,86,12,721 (5) Disallowance of power and fuel expenses 19,98,225 3.1 Aggrieved by the draft assessment order, the assessee had preferred to file the objections before the Dispute Resolution Panel (DRP for short). It was submitted by the AR before the DRP as follows: (i) The assessee-company IJM (India) Infrastructure Ltd., is carrying on the business of works contracts, construction and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry, 2011. The assessee explained to the Assessing Officer, the circumstances under which the letter heads could have been kept at the head office of the assessee. Without considering the assessee submissions, the Assessing Officer has disallowed the payments made to the sub-contractors. (vii) The Assessing Officer has collected information from the sub-contractors u/s 133(6) of the Income-tax Act, 1961. Based on the information collected from the sub-contractors, a show cause notice was issued to the assessee calling for explanation for the difference amount of Rs. 10,54,21,341. The information collected by the Assessing Officer is not reflecting the total transaction done by the sub-contractors. Hence, they are not comparable with the assessee record. The assessee explained the reasons for variation and reconciled for an amount of Rs. 9,21,54,736 in one sub-contractor account. However, without considering the reconciliation submitted by the assessee, the Assessing Officer has disallowed the said amount of Rs. 10,54,21,341 based on alleged discrepancies in the amount shown in the books of assessee vis-a-vis books of the sub-contractors. (viii) During the course of scr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is a transaction between two AEs and such transaction is of nature as referred to in Sec. 92B of Income Tax Act, 1961, it will not become an 'international transaction' so as to fall within the domain of Chapter X, unless such transaction is between two or more AEs and either or both of them should be non-residents. He relied on the decision of the Delhi Special Bench of the Tribunal in the case of L.G. Electronics India (P.) Ltd. Ors. v. ACIT (Del) (SB), 152 TTJ 273 (Del). 3.5 The AR reiterated that transfer pricing provisions are not applicable to transactions between two domestic related parties. The transfer pricing regulations have been specifically been made applicable to transactions between two domestic related parties by virtue of the amendment through Finance Act, 2012. In case, the existing provisions were applicable to domestic transactions then there was no need to bring the above amendment. 3.6 Based on all the above, the AR submitted that the TPO has erred in treating the transactions between the assessee and its AEs, as international transaction and applying transfer pricing regulations. The addition being bad in law is liable to be rejected. He relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent in India inasmuch as the business profits attributable to PE are taxable in India and all business decisions relating to PE are entered and concluded in India. In other words, the control and management of the affairs of PE are situated in India and therefore, the PE should be treated as resident in India, treating PE otherwise amounts to violation of Article 24 of DTAA with Malaysia. 3.11 He relied on the order of the Tribunal, Special Bench, Ahmedabad in the case of Rajeev Sureshbhai Gajwani v. Asstt. Commissioner of Income-tax, Circie-6, Baroda (129 ITD 145). 3.12 He submitted that IJM-IJMII JV (Joint Venture) between the assessee and IJM Corporation Berhad, Malaysia and IJM-NBCC-VRM (Joint Venture between National Building Construction Co. Ltd., VRM and the assessee) are also residents. These Joint Ventures are formed in India by an agreement between the respective parties and assessed in the status of AOP. According to the AR, in order to determine the residential status of AOPs, one has to refer to the definition given under sub-section (2) of Section 6 of Income-tax Act, 1961, which reads as under: "6. Residence in India. ---For the purpose of this Act. ... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T, 1 ITR (Del)/37 SOT 1 (DELHI). 3.18 He submitted that in the present case, the assessee had the following transactions with its AEs as detailed below:- S.No. Particulars Amount (Rs.) Remarks 1. IJM Corporation 93,67,11,155 Works contract expenses 2. IJM Corporation 1,64,87,452 Reimbursement of expenses paid to IJM Corp. 3. IJM-IJMII JV 54,45,01,543 Works contract expenses 4. IJM-NBCC-VRM JV 1,87,05,776 Works contract expenses 5. IJM-IJMII JV 39,76,26,155 Reimbursement of expenses received from JV 6. IJM-IJMII JV 41,51,82,999 Reimbursement of expenses paid to JV 3.19 In respect of S. No. l, IJM Corporation Berhad, Malaysia had secured two (2) contracts, namely (1) MCD Project from Municipal Corporation of Delhi (2) Sagar C-4 Project from National Highway Authority of India for up-gradation of existing road. These contracts were sub-contracted to the assessee company on back-to-back basis by retaining a margin of 3% of the contract value. In respect of S. No. 3, IJM-IJMII JV wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected by the assessee on the grounds as follows:- S.No. Name of the company Filter under which company should be rejected Reasons for rejections 1. Patel Engg. Ltd. Functionally different The appellant submits that this company is engaged mostly into hydro power. This company turnover and order book represents 60% hydro power related works. Whereas, the appellant who is engaged in works contract mostly into roads and buildings and civil works. The nature of the business is significantly different, this company deserves to be rejected as comparable. 2. Raheja Universal Ltd. Functionally different and economically different. The company is into residential and commercial constructions. Further, the company earned profit with the abnormal OP/cost percentage of 115.01%. The company has made an abnormally high profit and thus this company should be rejected as comparable. 3. Purvankar Projects Ltd. Functionally different and economically different. The company is into residential and commercial constructions. Further, the company earned profit with the abnormal OP/cost percent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as comparables. That apart, both the comparables have shown abnormal profits of 115% and 58% respectively. Therefore, such super-profit companies should be excluded as held by this Tribunal in the following cases: (a) Adobe Systems India Pvt. Ltd. v. Addl. CIT 44 SOT 49 (Delhi-URO); (b) ITO v. Saunay Jewels Pvt. Ltd. 42 SOT 4 (Mum.-URO); (c) Mentor Graphics 2007-(112)-TTJ-0408-TDEL; (d) E-Gain Communications v. ITO 118 TTJ 354 (Pune); (e) SAPIENT Corporation Pvt. Ltd. v. DCIT (2012) 15 ITR (Trib) 285 (Delhi); (f) Genisys Integrating Systems India Pvt. Ltd. (15 ITR (Trib.) 475 (Bangalore Bench); (g) Brigade Global Services Pvt. Ltd., Hyderabad v. ITO in ITA No. 1494/Hyd/2010 dated 26.11.2012. 3.25 He submitted that the TPO had rejected the loss making comparables chosen by the assessee and thus conveniently picked up only super-profit companies in his study, which is against the ratio laid down by the Special Bench of the Tribunal in the following cases:- (i) DCIT v. Quark Systems (P.) Ltd. 38 SOT 307 (Chd.) (ii) ACIT v. Wockhardt Ltd. 6 taxmann.com 78 (Mum.); and (iii) UCB India (P) Ltd. v. ACIT 121 ITD 131 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions. The AR also submitted that the effective control and management of this joint venture is in India. He submitted that there is no merit in the submissions of the AR. The transactions of the assessee with the joint venture were reported as international transactions voluntarily in the 3CEB Report by the auditor. On the basis of the Audit report, the TPO had determined the arm's length price of the international transactions. The Joint Venture is an Associated Enterprise. The assessee's case is squarely covered by Sec. 92A(1 )(b) r.w.s. 92A(2).(L) of the IT. Act. Sec. 92A(2)(L) stipulates that where one enterprise is an association of persons and the other enterprise holds not less than 10% of interest shall be deemed to be an associated enterprise for the purpose of Sec. 92A(1)(b) of the IT Act. Further, in the joint venture, there is a Non-resident entity, namely, IJM Corporation, Berhard, Malaysia. Thus, in the transaction of the assessee with the joint venture, there is a Non-resident. Further, the assessee's case also gets covered by 92A(1)(b) r.w.s. 92A(2)(a), (b) and (e) of the IT. Act. Therefore, the auditor has rightly reported the transactions with the joint venture as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purposes of section 92B(l) if the conditions contained in section 92B(2) are attracted. Section 92B(2) provides: "(2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 5.4 Section 92B(2) embodies a legal fiction. It deems a transaction to have been entered into between two associated enterprises. Though section 92B(2) is a part of section 92B with the heading "Definition of international transaction", it is to be read as an extension of section 92A(2) and not as an extension of section 92B(1). This is for the following reasons: (a) Both section 92A(2) and 92B(2) deal with situations under which two or more persons constitute associated enterprises. (b) Section 92B(1) does not define the term "associated enterprise". It defines the term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitutes an 'international transaction' under section 92B(1). In case section 92B(1) is not attracted, the fiction under section 92B(2) ceases to operate. In our opinion, the impugned transaction between the assessee and IJM-IJMII JV and IJM Corporation, Berhard, Malaysia and IJM-NBCC-VRM (JV) between National Building Construction Co. Ltd., VRM and the assessee does not fall under section 92B(2) of the IT Act. This is for the following reasons. 5.8 The assessee is a company incorporated under the provisions of the Companies Act, 1956 and is assessed to income-tax in the status of domestic company and whereas the AEs with whom the assessee had transactions are IJM Corporation Berhad, Delhi Project Office (PE in India), established the place of business in India under the provisions of Sec. 592 of the Companies Act, 1956 w.e.f. 30th May, 2005. 5.9 By virtue of its registration under provisions of sec. 92 [sic. section 592]of Companies Act, 1956 and its affairs are managed and controlled in India. Further, one of the Directors of the Principal Company is nominated as Attorney for the purpose of undertaking the contract awarded by the Municipal Corporation of Delhi and National ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrol in relation to business or activity wherefrom the profit is derived. (See - Egyptian Hotels Ltd. v. Mitchell [1915) 6 TC 542 (HL.). The Power of Attorney executed by the principal Company in favour of the Indian-resident Director to manage the branch operations in India clearly goes to establish beyond any pale of doubt the fact that the entire control and management in relation to operations in India is situated in India only. Therefore, the PE should undisputedly be treated as resident in India. 5.11 Moreover, under the provisions of DTAA with Malaysia, PE is treated as a separate legal entity, independent of its foreign principal enterprise. Further, Article 24 of the DTAA contains a non-discrimination provision. It prohibits a Contracting State from making any discrimination in the matter of taxation between its own national and a national of the other Contracting State, who are placed in similar circumstances. In other words, a Contracting State is obliged to provide the same tax treatment to a national of the other Contracting State as it would give to its own nationals. Article 3(h) of the DTAA defines the term "national" to include both-natural persons and artificia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, Galah, Ceylon v. CIT (1958) 34 ITR 1 that the control and management of its affairs means the de facto control and not the de jure and refers to controlling and directive power often described as "head and brain". 5.16 In the present case, all the decisions relating to the affairs of the Joint Venture are taken in India and the business is executed in India through a Joint Venture Agreement in India. Indisputably, Joint Ventures are residents in India. Even otherwise, Clause 3 of Article 4 of Malaysia provides that a person which includes AOPs also shall be deemed to be residents of the State in which its place of effective management is situated. On perusal of the Joint Venture agreements, it can be seen that all the decisions relating to the Joint Venture are taken in India and, therefore, the JVs are to be treated as "residents" only. 5.17 Further in the present case the transactions are between two resident parties as outlined at paras 3.18 and 3.19 of this order. There is no possibility of shifting of profits outside India or erosion of country's tax base. Therefore, its transactions with AEs are outside the purview of the transfer pricing regulations. This PE is assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Centre (P) Ltd. v. Asst. CIT [2008) (26 SOT 226) (Bangalore) and (119 TTJ 721); (b) Dresdner BANK A.G. v. Addl. CIT (108 ITD 375) (11 SOT 158); (c) ITO v. Zydus Altana Healthcare (P.) Ltd. (44 SOT 132) (Mum.); (d) Cotton Naturals (I) Pvt. Ltd., New Delhi v. DCIT, Circle 3(1), New Delhi in ITA No. 5855/Del/2012, dated 08.02.2013. 5.20 The primary condition for attracting transfer pricing provisions is that there should be a transaction between two or more AEs in terms of section 92A(1) and 92A(2) of the Act. After considering the entire facts and circumstances of the present case and the findings of the DRP, we are of the opinion that the transactions taken place are with domestic enterprises and at least one among the AEs are not non-resident. Both the assessee and other parties which whom the assessee entered into transactions are the residents for the purpose of Indian Taxation. Any transaction between them will not constitute an international transaction. The transactions between the assessee and IJMII do not fall under section 92B(2) of the Act and same is the position in case of other entities with whom assessee carried on the impugned transactions. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 302/Hyd/2011, dated 30.03.2012. In the light of the aforesaid submissions, it is submitted that this Tribunal may be pleased to pass such order or orders as may be deemed fit and proper in the interest of all canons of fair play and justice. 6.3 Regarding the disallowance of payments made to sub-contractors for a sum of Rs. 10,54,21,341/-, it was submitted by learned DR that the assessee had paid a sum of Rs. 328.53 crores to various sub-contractors. The assessee was asked to furnish the names and addresses of the sub-contractors to whom the work of the assessee was entrusted to. The assessee furnished the names and addresses of 998 sub-contractors. The Assessing Officer had sent letters u/s 133(6) of the IT Act to about 750 sub-contractors requesting them to furnish the confirmation of balances in their books of account of the assessee with the supporting evidences, if any, for the previous year. In response, replies were received from 115 sub-contractors and in 31 cases, the transactions of the sub-contractors in their books of account did not tally with the books of account of the assessee. The total amount reflected in the books of account of the assessee in respect of 31 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs for a sum of Rs. 1,86,12,721/-, the DR submitted that the Assessing Officer had sent 750 letters u/s 133(6) to various sub-contractors and the postal authorities had returned back 221 letters and no replies were received from 414 sub- contractors. In respect of letters returned unserved, in 221 cases, the assessee had made payments to sub-contractors for a sum of Rs. 37,22,54,421/- and claimed the same as business expenditure. The assessee was directed to explain the transactions in respect of letters unserved. The assessee submitted that various works were executed and the addresses furnished by the assessee were temporary in nature and requested the Assessing Officer to address letters to permanent addresses of the payees from the PAN data base of the Department. The Assessing Officer held that the basic burden is on the assessee and such a burden is not discharged. The Assessing Officer observed that a portion of the expenditure out of the letters which were returned un-served was not genuine expenditure. The Assessing Officer disallowed 5% of the sub-contract payments attributable to 221 letters amounting to Rs. 1,86,12,721/- and the same is to be confirmed. 6.6 Regarding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the same was proved to be paid for commercial considerations. It is for the assessee to adduce necessary evidence in this regard. Mere fact that on earlier occasion the Tribunal has allowed similar claims in case of other assessees, that cannot be a ground to allow the claim in full without satisfying the necessary conditions existent to allow the claim in the present case. 7.2 In the present case, the assessee has incurred expenditure and claimed as deduction. The claim was not allowed by the Assessing Officer or by appellate authority on the reason that this payment is not verifiable and they doubted the genuineness of the payments. 7.3 With regard to the proposition that it is for the assessee to discharge whether any expenditure should be incurred in the course of his business or trade and such expenditure may be incurred voluntarily and without any necessity and such expenditure is incurred, even voluntarily for promoting the business interest and to earn profit, the assessee is entitled to claim deduction under sub section (1) of 37, though there is no compelling necessity to incur such expenditure. It is also observed that payment itself not established and, secondly i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure on scientific research. Section 35A deals with expenditure on acquisition of patent right or copy right. Section 35AB deals with expenditure on know-how. Section 35ABB deals with expenditure for obtaining licence to operate telecommunication services. Section 35AC deals with expenditure on eligible project or scheme. Section 35AD deals with deduction in respect of expenditure on specified business. Section 35B deals with export market development allowance. Section 35C deals with agricultural development allowance. Section 35CC deals with rural development allowance. Section 35CCA deals with expenditure by way of payment to association and institutions for carrying out rural development programmes. Section 35CCB deals with expenditure by way of payment to associations and institutions for carrying out programmes of conservation of natural resources. Section 35D deals with amortization of certain preliminary expenses and 35DD deals with amortization of expenditure in case of amalgamation or de-merger. Section 35DDA deals with amortization of expenditure incurred under voluntary retirement scheme. Section 35E deals with deduction for expenditure on prospecting etc. for certain mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallow the expenditure incurred by the assessee. 7.9 In CIT v. Sigma Paints Ltd. (1991) 188 ITR 06 (Bom), their Lordships of the Hon'ble Bombay High Court held and observed at pages 7 8 of the Reports as under: " .Shri Patel, learned counsel for the respondent-assessee, has invited our attention to the fact that the assessee had appeared as an intervener before the Special Bench of the Tribunal when it was considering the appeals relating to French Dyes and Chemicals (I.) (P.) Ltd. He has further invited our attention to paragraphs 24 to 28 of the judgment in that case to show that the assessee had produced various details and the records maintained by the company relating to the secret commission payments. Vouchers for the amounts received by the sales officer or other responsible persons for the payment of secret commission were available. The details of sales transactions entered into with various mill-companies, in respect of which secret commission had to be paid, were available. There was a complete tally between the commission paid and the Extent of business done by the mill-company. Details were also available of the exact transactions in respect of which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment was not established by the assessee. In our opinion, genuineness of the payments was established by the assessee. 7.12 We may note at the cost repetition that the decision of the Hon'ble Bombay High Court in CIT v. Sigma Paints Ltd. (1991) 188 ITR 6 (Born), clearly supports the case of the Assessee Company. In that case there was payment of secret commission. The assessee company, in that case, had produced various details and records maintained by it relating to commission payments. The details of sales transactions entered into with various mill companies, in respect of which secret commission had been paid, were produced before the assessing officer along with payment vouchers. There was a complete reconciliation and tally between the commission paid and the extent of business done by the mill company. The payments were correlated to the transactions which the assessee had with those persons. The only missing link was stated to be the names of the particular parties to whom the payments were made. This, the Tribunal held, could not be supplied without detriment to the business interests of that assessee, considering the very nature of things. 7.13 The initial onus and ..... 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